Only 2 Cases Where Operating Under the 180-Day lisence Makes Sense

Introduction

To investors considering the Short-Term Rental (STR) business in Japan: We generally recommend operating with a "Hotel Business" (Ryokan-gyo) license, which allows for 365 days of operation per year. However, the Japanese legal system offers an alternative known as the "Private Lodging Business Act" (Minpaku New Law), which allows operations under simpler requirements.

In this article, we will explain why operating an STR business under the Private Lodging Business Act is generally not recommended, and then detail the specific cases where it may still be a viable option.

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Chapter 1: Why Operating Under the Private Lodging Business Act is Not Recommended

There are three main reasons why we do not actively recommend operating under the Private Lodging Business Act.

1. The 180-Day Operating Limit

The biggest restriction of the Private Lodging Business Act is that the number of operating days is limited to 180 days per year.

Statutory Limits and Local Regulations

- Statutory Limit: The number of operating days is calculated not by the calendar year, but from April 1st to March 31st of the following year. Providing accommodation for more than 180 days within this period is prohibited.

- Additional Local Regulations: While the Private Lodging Business Act sets a "180 days per year" limit, some municipalities impose even stricter restrictions. This is especially true in popular tourist destinations like the 23 wards of Tokyo and Karuizawa.

For example, some municipalities only allow operations on weekends (Saturdays and Sundays), making the actual limit far stricter than 180 days. In such extremely restrictive areas, there is a high possibility that profits will not only be non-existent but negative. This is a critical risk factor that must be checked when selecting a property.

Monitoring Systems and Penalties for Violations

- Strict Monitoring: Major OTAs (Online Travel Agencies) are required to report the number of operating days to municipalities, and municipalities strictly monitor this. Violations are easily discovered.

- Penalties: Exceeding the limit can lead to administrative guidance, business improvement orders, and ultimately fines (up to 1 million yen).

Impact on Profitability

- Decreased Revenue: Naturally, annual revenue will decrease significantly compared to a Hotel Business license that allows full operation. However, profits do not simply halve. Details are explained in Chapter 2.

2. Risk of Legal Revisions (Potential for Stricter Regulations)

The Private Lodging Business Act has been frequently revised since its enactment, and regulations tend to become stricter.

- Past Revisions: There are many cases where things that were previously possible are no longer allowed, such as stricter land use regulations, operating restrictions in specific zoning areas, and stricter requirements for prior notification to neighboring residents.

- Future Risks: Further tightening of regulations (e.g., banning weekend operations, banning operations in specific areas) is possible in the future.

In short, the risk of business continuation becoming difficult due to stricter regulations is significantly higher than with a Hotel Business license.

3. Risk of Trouble with Neighboring Residents

The location characteristics of properties operating under the Private Lodging Business Act increase the risk of trouble.

- Location Characteristics: Properties that cannot obtain a Hotel Business license are often located in residential zoning areas. In the vast majority of these areas, Minpaku (private lodging) is not widespread.

- High Probability of Neighbor Trouble: Operating in areas with low understanding of Minpaku easily leads to complaints from neighboring residents regarding noise, garbage disposal, and parking issues. If neighbor trouble becomes serious, it can lead to complaints to the municipality and potentially administrative guidance.

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Chapter 2: Economic Comparison Between Hotel Business and Private Lodging Business Act

The simple calculation that "a 180-day limit means profits are simply halved" is not practically accurate. The following factors must be considered.

Burden of Fixed Costs

Whether operating as a Hotel Business or under the Private Lodging Business Act, the following fixed costs are incurred at roughly the same amount:

- Property acquisition and holding costs (fire insurance, fixed asset tax, system usage fees)

- Fixed portion of management and cleaning fees

- Utility costs (base rates)

As a result, even if the number of operating days is halved, fixed costs are not halved.

Impact on Occupancy Rate and Unit Price

While there is a limit on operating days, there is also the possibility of supplementing profits through high-unit-price operations.

- Hotel Business Occupancy is Not 100% Anyway: When we manage properties, we adjust the ADR (Average Daily Rate) so that the occupancy rate is around 85% in urban areas like Tokyo and Osaka, and 50-60% in regional areas. In other words, even if 100% operation is possible with a Hotel Business license, the occupancy rate will realistically settle at around 85% at best.

- Improving Unit Price: If a target occupancy rate of 50% is acceptable, there is an advantage in being able to focus the limited 180 days on highly popular periods and operate at high unit prices.

- High Value-Added Operations via Early Check-in/Late Check-out: By adopting an operating method that avoids same-day check-ins and check-outs, it is possible to increase the unit price.

For example, an operation with a 10:00 AM check-in and an 18:00 PM check-out, with cleaning done at night, is entirely realistic.

Therefore, even if the number of operating days is halved (180 days), on a profit basis, it is often possible to secure about 70% of the profit of a Hotel Business that can operate every day.

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Chapter 3: Cases Where Operating Under the Private Lodging Business Act is Acceptable

For the reasons above, we generally do not recommend operating under the Private Lodging Business Act.

However, investment execution decisions should be based not only on business viability but also on the investor's life plan and asset strategy. In the following cases, there is room for consideration.

Common Traits of Acceptable Cases

The common trait of these cases is that the STR business is not the primary purpose; the primary purpose is actual demand (personal use) or asset holding, and business income is merely secondary. Therefore, the risks of stricter regulations and decreased profitability can be tolerated.

Specific Cases

Case 1: Using it as a Second Home in Japan with Future Relocation in Mind

- Use as a Second Home: Planning to stay for about 1-2 months a year personally.

- Supplementing Maintenance Costs: Operating an STR business to supplement maintenance costs during periods of non-stay.

- Future Conversion: Planning to quit the STR business and convert it to a primary residence when relocating to Japan in the future.

In this case, the property is "personal asset," and the STR business is merely a "means to supplement maintenance costs." The ultimate use of the property is a "residence," and the STR business is only a temporary utilization.

Case 2: Extremely Rare Location Where Asset Value Preservation is the Primary Purpose

- Rarity of Location: A location where future price appreciation is expected, such as prime real estate in Tokyo.

- Primary Purpose of Asset Holding: Operating it just enough to supplement maintenance costs based on the judgment that "doing nothing is a waste."

- Long-Term Utilization: Considering residential use or sale in the long term.

In this case, the rarity of the location and the preservation of asset value are the primary purposes, and business income is secondary.

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Chapter 4: Operation in Condominiums/Apartments is Practically Impossible

Here, we emphasize the following important restriction.

The Reality of Condominium Bans

In many condominiums and apartments in Japan, STR businesses in general are prohibited, regardless of the license type.

- Ban Rate: In fact, Minpaku/STR businesses are prohibited in 99% of condominiums. Condominium management associations often establish management bylaws that prohibit STR businesses from the perspectives of safety management of common areas, preservation of the living environment for neighboring residents, and maintenance of the building's asset value.

- Exceptions: Except for some old multi-tenant buildings with poor management conditions, it is basically impossible.

Detached Houses are a Prerequisite and Considerations at the Design Stage

Therefore, when considering an STR business, operation in a detached house is a prerequisite.

Furthermore, importantly, when operating a second home or vacation home as an STR, we recommend installing an owner-exclusive private bedroom and an owner's closet from the property's design stage.

Separate from the guest space, securing a dedicated space that the owner does not want to share, or a storage area for personal belongings when staying, and introducing a mechanism to lock and manage these separately will make stays much more comfortable.

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Chapter 5: Towards Investment Decisions

As described above, operating under the Private Lodging Business Act comes with many restrictions and challenges. However, depending on the investor's life plan and asset strategy, it is an option worth considering.

When considering the execution of an STR investment tailored to your life plan, please feel free to consult with us.